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Schork Oil Outlook: Strong Cap Utilization—But Production Drops?!

Yesterday, Uncle Sam reported a 2.76 MMbbl increase in total crude oil stocks, well above the 1.5 ± 0.6 MMbbl seasonal trend and the 1.00 MMbbl build expected by analysts.

Regardless, Nymex WTI prices rebounded slightly from a pre-release sell-off (likely due to increases in capacity utilization) — but ended the day significantly lower.

On the regional breakdown, the Cushing, Okla. hub saw its second largest build of the year, of 1.68 MMbbls. This led to a further drop in the contango, with the front month now trading at a $3.07 discount to the second month, five cents wider than it was on Tuesday. Until we see a significant pull-back at Cushing, we expect the contango to remain steep.

Capacity utilization rose for the seventh consecutive week and now stands at 89.9%, its highest point since May 2008. Total crude oil throughputs are at a two year, while throughputs in PADD 3 are at a four year high… but what are they making? Gasoline, jet fuel, ultra-low sulfur diesel and propane all saw drops in production last week – with only residual fuel oil and low sulfur diesel seeing increases.

This strikes us as odd, why would refiners not take advantage of the strong gasoil crack and increase ULSD? Or prepare for summer driving demand by making mogas? In fact, what happened to all those refinery inputs? We would thus not be surprised to see a true-up in next week’s DOE report.

Following the dissipating ash clouds from Eyjafjallajökull, jet fuel demand began trending back towards seasonal norms. Thus last week saw a 0.30 MMbbl build in total stocks, compared to the 1.62 MMbbl build seen in the previous week. Total stocks remain 9.36% above last year and we expect them to remain high – flights to and from parts of Ireland were cancelled yesterday due to lingering ash.

Imports of crude oil remain robust, currently standing 1.2% above last year. Distillate imports are also 2.8% above last year, but keep in mind that demand for distillates rose to 13.03% above the same time last year. Thus, here at The Schork Report, we are not ready to short the heating oil crack just yet…

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.